Billionaire Andrei Guriev was one of several wealthy businesspeople to resign from the upper house of Russia’s parliament in the months before the Putin-sponsored ban on officials holding foreign bank accounts took effect. Guriev said he was resigning to focus more intently on his businesses.
As President Obama clashes with Congress over spending authorizations and debt ceilings to keep funds flowing outward from the U.S. government, his counterpart in Moscow is celebrating a victory that has brought lawmakers’ own money flowing back into Russia.
Six weeks ago, just as Washington’s budget battles began heating up yet again, Russian lawmakers and other senior officials reached an Aug. 18 deadline for either withdrawing their money from foreign bank accounts or withdrawing from office. That deadline marked the end of a three-month grace period that began in May, when the Kremlin-initiated measure took effect. The legislation, which also covers foreign-issued financial instruments, applies to President Putin and his Cabinet, members of parliament, federal judges, regional governors, chief executives of state-owned companies, others senior officials, and the spouses ad underage children of those officials and executives.
The Kremlin has not disclosed the amount of money repatriated to Russia because of the law, but the measure’s effect can be quantified by another metric – resignations from the legislature. In July, the state-owned news agency RIA Novosti noted, “The nine members of the 166-seat Federation Council who have left since President Vladimir Putin first floated the asset ban in December do not openly attribute their decision to the tighter rules. But at least five of them figure in Forbes’ magazine’s ratings of richest Russians, and their fellow senators, as well as experts, speak openly of moneyed officials’ new dilemma: wealth based overseas versus political power at home.” The RIA Novosti account quoted Federation Council Chairman Valentina Matviyenko as saying she expected at least two more of her colleagues in the upper house to resign this fall.
While the Kremlin’s critics are quick to characterize the measure as another Putin power play or a loophole-laden effort to position the President as an anti-corruption campaigner, one American expert on Russian government cautions that a more-comprehensive assessment is needed to understand the full range of motives at play and the potential consequences – intended and otherwise.
“The Presidential Administration clearly is the big winner in this, both because Putin initiated the measure and because the executive branch – rather than some independent agency – collects and holds all of the financial disclosure information from senior officials. Putin has assigned Sergei Ivanov, the chief of staff of the Presidential Administration, to review the data that has been submitted. But instead of looking only at who wins and who loses in the near term, it’s important to look back at the larger context which gave rise to this law and ahead to its effects, not all of which may have been anticipated by the Kremlin,” says William Pomeranz, J.D., Ph.D., Deputy Director of the Kennan Institute for Advanced Russian Studies at the Woodrow Wilson Center in Washington, D.C.
Pomeranz explains that the larger context includes not only the banking crisis in Cyprus, where Russian individuals and companies who held roughly $31 billion in deposits took a serious hit when Cypriot officials expropriated many accounts, but a much-broader problem. “Russia really faces a revenue crunch in terms of both its tax base and capital flight,” says Pomeranz, who notes that $67 billion left Russia in the first three months of this year alone.
On the international stage, Pomeranz sees the Kremlin’s concern with “bringing the money back home” driving greater Russian support for global financial-reporting accords while perhaps complicating its efforts to foster regional economic integration in what Russians sometimes term the “near abroad.”
“Like President Obama and the other leaders of the G20, President Putin has a strong interest in combating tax avoidance and offshore tax havens. The rise of ‘stateless wealth’ is a real problem for all of them, so this issue provides common ground and a common motivation to work together,” Pomeranz says. He notes that Russia has begun negotiations with the U.S. on means of ensuring that Russian financial institutions adhere to the provisions of the Foreign Account Tax Compliance Act (FACTA), a U.S. measure targeting Americans who try to hide money overseas. As Pomeranz wrote in a Reuters article last month, however, cooperation with the U.S. on FACTA and with the Organisation for Economic Cooperation and Development (OECD) on an broader campaign, cuts both ways in terms of the central theme of Putin’s foreign policy. “To a certain extent, the demand that Russian money stay onshore corresponds to Putin’s persistent emphasis on sovereignty – that no country has the right to interfere with another country’s internal affairs. Yet for the struggle against offshore tax havens to succeed, every country, including Russia, will have to sacrifice some degree of sovereignty so that critical information can be shared and international tax loopholes closed.”
Pomeranz says the efforts to stem the flight of funds from Russia also will require the Kremlin to re-appraise the structure of its Customs Union with Kazakhstan and Belarus, because the arrangement’s lax regulations enable Russians to dispatch money to foreign locales under cover of sham transactions supposedly occurring in those former Soviet Socialist Republics. “Last year alone, approximately $15 billion is estimated to have been siphoned out of Russia via Belarus through all sorts of schemes,” notes Pomeranz, who served as the National Endowment for Democracy’s Program Officer for Russia, Ukraine and Belarus from 1992 to 1999.
In terms of domestic politics, Pomeranz sees the legislation aligning squarely with two key Putin initiatives – the aforementioned focus on enhancing government revenues through a policy of “de-offshorization,” and a determination to bind the interests of Russian millionaires and top officials more closely to that of country itself by “nationalizing the elite.”
“Putin had first talked about his policy of de-offshorization in a December 2012 state-of-the nation speech,” Pomeranz wrote in an April 2013 article, adding that, “Within two months, Putin proposed a ban on government officials from holding overseas bank accounts and owning foreign-issued stocks and bonds. This draft legislation was followed by an April 2 decree requiring that government employees submit reports on income and expenditures to the presidential administration by the beginning of July including all information regarding foreign bnak accounts, securities and property.” Further, Pomeranz notes in the article, the Russian President demanded that future privatizations of large state-owned companies take place only on the Moscow Exchange, which would enable the Kremlin to assure that proceeds from that initial transaction and subsequent stock trades would remain in Russia.
While the effort to keep Russian money in Russia may well accomplish Putin’s aim of nationalizing the elite, Pomeranz says that the campaign’s individual measures all may be trumped by the law of unintended consequences. He explains that so long as oligarchs and top officials could salt away money in foreign bank accounts, “It gave them a certain sense of security and stability,” so that they didn’t feel it was in their personal interests to demand a greater respect for the rule of law and property rights in Russia, or to object to the jailing of businesspeople who ran afoul of the Kremlin. If those elites’ financial fate is tied more closely to that of their country, Pomeranz notes, the linkage may give many of Russia’s most powerful citizens cause to coalesce around a shared, self-interested concern with both property and personal rights, and to no longer acquiesce in the Kremlin’s heavy-handed treatment of tens of thousands of incarcerated businesspeople. “And therein lies the paradox of Putin’s campaign,” he notes.
